Britons feel as sense of deja vu with the early 90s as house prices fall
Posted on 08 June 2011 with 3 comments from readers
Britain’s biggest building society the Halifax has reported a five per cent fall in house prices in the year to May. But this is probably only the start for a serious correction in UK house prices in a repeat of a squeeze not seen since the recession of the early 90s.
Then as now a financial crisis in the shape of the 1987 stock market crash was followed by a period of relative calm and even rising house prices in some areas, only to be dashed by a three-year downturn that left many late-cycle buyers deep in negative equity.
Down-cycle
Repossessions rose alongside unemployment and those sales at depressed prices took the whole housing market down. Older readers and home owners can be forgiven a sense of deja vu, although people’s memories can also be remarkably short when it comes to bad news.
Certainly for anybody who lived through the worst recession since the Second World War, the John Major Recession, should remember very well that house prices do not always go up in the UK, and when they go down the fall can be brutal, especially for properties in poor locations.
London Docklands boomed in the late 80s and then fell into a savage property slump with over-building of warehouse conversions depressing the market more than the national norm. By 1993-4 some great bargains emerged but that meant pain for others who bought in the boom.
Will it be different this time? At present properties in the areas of London favored by international buyers are holding up well. It would take a double dip global recession to reverse that trend, particularly with high oil prices benefiting Middle Eastern and Russian buyers.
Income squeeze
Outside of these rather limited areas the indigenous population is suffering an income squeeze from tax and inflation, and even super-low mortgage rates are not enough to sustain house prices.
The real danger is when mortgage rates eventually have to go up. Then house prices will be really clobbered. So the government has every incentive to try to keep rates low. Can this be done?
Not indefinitely is the answer, and the timing of the eventual rise in mortgage rates is dependent on a global financial system largely outside the control of the UK government. Thus a tumble in house prices over several years, like in the early 90s, looks inevitable. Houses have, after all, become far too expensive by any yardstick.
3 Comments posted by readers:
Another great, easy to understand article as to why house prices might become more affordable for potential 1st time buyers.
Totally agree and great news for serious UK property investors. It’s like hearing that your wife’s favourite handbag brand is going to be selling at discount levels for the next 5 years! Overpriced – Yes…. Good value & quality – of course! I still own 2 properties purchased in the 1987-95 correction and they have been amazing investments. Even then the bank were willing to cover 90% of the start up and revenue has been uninterupted but for small refurbishment periods. They are worth 3 times the amount paid and generate reliable returns. The trouble with most mainstream economists is they don’t give you the full picture. With much tougher lending criteria, the average punter is forced to rent….let’s have an article about how bouyant the rental market is in UK property.
Hope for first time buyers?, Good investment as a rental cash machine? Well at least some people are happy about the house price collapse.
Before people gloat too much please spare a thought for all of those other people with families who are about to suffer from the effects of stagflation, wages cuts, and job losses. Yes some people will benefit from others miss-fortune, but we should not loose sight of the fact that many people with young families stretched themselves to the limit (and beyond) in order to buy a family home and make a better life for themselves. A cut in thier income or a rise in interest rates could push these people over the edge. In a falling market these people would not even have the option of selling thier home as the mortgage on it would more likely be more than the current value of the home. Indeed this problem has already occured in some industrial areas in the north of England and in Wales. People are actually walking away from thier homes and abandoning houses in towns were there are no jobs and therefore no buyers. In some old mining and industrial towns a house with a garden can now be bought for less than £10000 ($16000 USD). Yes in some parts of the UK the ‘bubble’ has already well and truely burst but tends not to get reported. Lets see what happens to London and other areas in the South when the next financial crisis hits – a flat in Mayfair for £10000? Who knows, but for every ‘winner’ there is at least one looser, and often it is of no fault of thier own. Stay humble, do not gloat, and remember that missfortune could hit you from an unseen angle too.